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Steering a steady corporate course

OPPORTUNISTIC is a word Michael Chaney is only momentarily comfortable with as a description for his sprawling conglomerate, Wesfarmers. After consulting with media adviser Keith Kessell, a more refined term is found.

“I prefer opportunity driven,” Mr Chaney said.

The former, it seems, sounds more like someone involved in a handbag snatch, and Wesfarmers certainly couldn’t be accused of that in its most recent opportunity-driven foray – the $2.5 billion bid for Howard Smith.

Far from any form of mugging, the takeover bid has been hailed by the market as a winner for both sides and helped push Wesfarmers share price up to as high as $30.

The Howard Smith bid is part of a concerted long-term push into hardware, originally mimicking the US giant Home Depot, with the Bunnings Warehouse concept that was rolled out among the southern states.

Bids like this are also the only visible sign of the frenetic activity going on at Wesfarmers business development unit, where Mr Chaney believes his staff run the ruler over far more opportunities than any similar player in Australia.

This is the area where, arguably, Wesfarmers is shaped, rather than through any defining direction from above.

Mr Chaney said that the company had copped significant criticism over the years for lacking vision.

But, if vision means paying over the odds for assets just to achieve a pre-determined place in the market, he’s happy for others to have it.

He said he would not be forced to manufacture missions, like becoming the number one in any particular sector, the kind of commitment which has undone many a chief executive and their companies.

“Our vision is to provide a satisfactory return to share-holders,” Mr Chaney said.

“It is only when you actually perform that people take any notice of you.”

In the nine years since Mr Chaney took the helm, Wesfarmers has changed con-siderably and in a way that could not have been predicted a decade ago.

Condense the time line and the company has shown many of the attributes of a serial mugger – the patient stalking and the weak targets. Perhaps all that is missing is any sign of a battered victim.

This corporate attitude has helped change Wesfarmers from a sedate fertiliser and chemical company not far from its cooperative roots to an aggressive, expansionist energy and retail company in less than a decade.

And Mr Chaney testifies that this is what keeps him interested enough in the job – a job he plans to continue in for some time yet – well beyond the usual 10-year tenure of a Wesfarmers chief executive.

“We have had a philosophy of about 10 years,” Mr Chaney said.

“The board has discussed that with me in the past year or two and we have mutually agreed it should be longer.

“I have agreed that I will be here for the best part of the next five years.”

He said the ever-changing world of Wesfarmers maintained his enthusiasm for the job.

“It is always different,” Mr Chaney said.

“The exciting challenge is to keep on top of the TSR (Total Shareholder Returns) heap.”

He said Wesfarmers had grown at 30 per cent a year compounding since he took the reins.

That was certainly enough for Mr Chaney when the top job at BHP came up about two years ago.

Already a director of BHP, there was considerable speculation that he might take on the biggest job in corporate Australia, trying to turn around the mining behemoth which had lurched badly following a series of poor decisions.

“I was not interested in doing that job at the time. I thought we had a lot to do here at Wesfarmers,” he said.

“It was more important to bring someone from outside.”

It is a philosophy he extends to his own management.

“It is useful, sometimes, to have outsiders to come in and effect a culture change,” Mr Chaney said.

“Everything (every division) except Bunnings Building Supplies is headed by someone who has come in from outside, generally through business development.”

Right now, a new arrival from Brisbane, Mark Allison, is being groomed to take over Wesfarmers CSBP from Peter Knowles who retires on August 31.

All of this talent, both within and without, has been stretched to the limit during the past year as Wesfarmers has engaged in one of its busiest periods of corporate activity.

Of course, the company has always been busy. Labelled the perennial bridesmaid, Wesfarmers missed out a number acquisitions which it put its hand up for.

Privatisations such as the Perth Airport and the Bunbury to Dampier Natural Gas pipeline were tendered for, while an outright bid for WA insurer SGIO was lost to Sydney-based NRMA.

The company is also known to have looked closely at Orica and had wanted to get Primac.

This past year, Wesfarmers has recorded a number of wins but Mr Chaney denies the company has changed its acquisition philosophy – insisting that the business case for any takeover activity must be as tough as it ever was.

He said the argument about internal hurdle rates for investment opportunities was a furphy, even though Wesfarmers also has been unmoved on these rates in real terms.

“Every company has the same hurdle rate, they are just more or less optimistic with their projections,” Mr Chaney said.

Perhaps, then, the past 12 months have become a bit of a buyers’ market, because Wesfarm-ers has suddenly stopped running second in the takeover races.

Slipping under the guard of rival WA industrial Futuris, Wesfarm-ers took over rural merchandising rival IAMA.

It was a bloody fight, involving legal battles before the South Australian Supreme Court, as Futuris took offence to being gazumped for a target it had stalked for years.

Mr Chaney shrugs off the pressure of legal action, some of it directed personally at him, as simply part of the business.

“It was hard to achieve that merger without a (initial) shareholding and the fact that we did was gratifying,” he said.

In the middle of that period, Wesfarmers came up trumps with a privatisation, winning Westrail as part of a consortium.

The new year had barely started when the conglomerate shifted straight into restructuring its ownership to end the takeover proof arrangements created by the Franked Income Fund. A move that was worth much the same as its recent bid for Howard Smith.

Mr Chaney said this activity has not stretched the organisation financially but there was no doubt that, from the human resources point of view, there was an impact.

“We have unlimted capital as long as we come up with opportunities. Personnel wise it is an issue. You are constrained,” he said.

Mr Chaney said it was not just personnel issues which restricted how much Wesfarmers could tke on at one time.

There were also administrative details, such as foregoing a $300 million acquisition because it would have interfered with plans for the Howard Smith bid.

“As a practical matter you could not do anything else because your prospectus is wrong,” Mr Chaney said.

But that is not the only thing which has kept Wesfarmers management tied down for the past year or more.

The forest debate, for instance, had the potential to put considerable pressure on Wesfarmers, particularly with its strong performing retail arm offering a potential target.

The company even had an extraordinary shareholders’ meet-ing over the issue.

More recently, an arsenic spill in Cockburn Sound rang alarm bells and provided some nasty head-lines. Yet much of the bad news evaded the company.

Mr Chaney agrees that Wes-farmers had felt less impact than other companies had for similar mistakes.

“Some years ago we went out of way to demonstrate we are good corporate citizens,” he said.

“We have a large philanthropic program, we give millions away now to charitable causes ... we have a huge arts support program.

“We are seen around town by influential people as strong supporters of the community, giving something back.”

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Wesfarmers (WES)

Share Price

Closing price for the last 90 trading days
Source: Morningstar

BN30 Index

Index = 100 as of 4 Jan 2016
Source: Morningstar

Total Shareholder Return as at 29/06/18

1 year TSR5 year TSR
162ndSeven Group Holdings79%29%
288thWesfarmers30%10%
345thSeven West Media21%-9%
420thAustal4%22%
538thAutomotive Holdings Group-10%3%
722 WA (and selected non WA) listed companies ranked by 1 year TSR relative to other companies with similar revenue
Source: Morningstar

Share Transactions

14/06/18
$47k Bought
05/04/18
$5k Issued
05/04/18
$11k Issued
Total value as at the date of the transaction
Source: Morningstar

Revenue

1st-Wesfarmers$68,648.0m
2nd-Automotive Holdings Group$6,079.6m
3rd-Seven Group Holdings$2,340.3m
4th-Seven West Media$1,679.0m
5th↑Austal$1,325.3m
239 listed industrial companies ranked by revenue.
Source: Morningstar

Remuneration from Wesfarmers

3rdJohn Durkan$5.288m
5thGuy Russo$4.038m
17thRob Scott$1.908m
Ranked by total remuneration from all listed WA companies

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